GSK keeps tone friendly despite hostile HGS approach

In confirming its unsolicited $2.60 billion bid for Human Genome Sciences, which has been rejected, GlaxoSmithKline says it still hopes to push through the deal "on a friendly basis".

The UK drugs major noted that its $13.00 per share offer represented an 81% premium to HGS’ stock price on April 18, and chief executive Sir Andrew Witty (pictured) said it "reflects full and fair value". The board at HGS, which developed the lupus drug Benlysta (belimumab) with GSK, disagrees and has hired Goldman Sachs and Credit Suisse to explore "strategic alternatives…including, but not limited to, a potential sale of the company". GSK has been invited to participate in this process.

In a letter to his counterpart at HGS, Thomas Watkins, Sir Andrew noted that the firms have collaborated for nearly 20 years "and we greatly respect your history of innovation and what you have achieved". However, "we believe now is the appropriate time in the evolution of our relationship for our two companies to combine".

He went on to say that "GSK is uniquely positioned to deliver on the promises" of Benlysta, as well as the late-stage cardiovascular drug darapladib and albiglutide, currently in Phase III for the treatment of type 2 diabetes, drugs that HGS has a stake in. Sir Andrew noted that he was disappointed the $13 offer was "rejected without discussion" but added that "we hope to work with you on a friendly basis to complete this transaction successfully and expeditiously".

$200 million in cost synergies

The GSK chief said that "we also expect to achieve at least $200 million in cost synergies to be fully realised by 2015 and expect the transaction to be earnings-accretive beginning in 2013". He added that the proposal meets GSK’s "strict financial criteria for acquisitions".

Observers are not sure whether the offer seems a reasonable one or not given that HGS share price fluctuates considerably and was in the $30 region a year ago. However the launch of Benlysta, the first lupus drug to be approved in 50 years, has been disappointing.

Mark Clarke, an analyst at Deutsche Bank, issued a research note saying that for GSK, the attraction in acquiring HGS would be removing its profit share and royalty obligations on Benlysta, albiglutide and darapladib. He added that "whether such a deal ultimately would be EPS-accretive for GSK – and to what degree – would depend on the long term outlook for Benlysta (which has got off to a slow start) and the two partnered pipeline drugs, both of which have risks attached to them".

Paul Chapman, partner at intellectual property specialists Marks & Clerk, noted that "this rather stark dismissal of GSK's not inconsiderable offer goes to show just how highly biotech companies such as HGS value their portfolios and pipelines". He cites the Roche/Illumina saga where the Swiss major abandoned its bid for the gene sequencing firm despite raising its offer "to levels that it clearly thought generous. Illumina simply wasn’t having any of it. Nor, it seems, are HGS".

He goes on to say that “major players in the pharmaceutical industries are in a bind, they need to rejuvenate pipelines and absorbing smaller, promising biotech firms is an attractive way of doing so". However, "the likes of HGS and Illumina are quite aware of the advantageous position they are in, and are playing their hand accordingly".